Is there some good news on income inequality?
Published January 26, 2023
Decades from now, people who lived through the pandemic will remember it as a horrible period. Over a million people in our country died, with millions more sick but still surviving. Thousands of businesses closed forever, learning was lost in schools, and lives were disrupted in multiple ways.
But could there be some positive impacts from the pandemic? Some say the new technologies for remote interactions in business, medicine, and shopping have been a plus. The pandemic revealed dependencies we’ve developed on other countries for some key products. This has sparked renewed interest in “re-shoring” of some of those products to our country, which would both increase our economic independence and create jobs.
One of the biggest economic issues of our time has been widening income inequality. This simply means the income gap between those with higher incomes and those with lower incomes has been growing.
A big reason for this trend is economic changes in the 21st century. Technology has been the driver of much of the recent economy. Firms in the tech sector need highly trained workers, often with four-year college degrees or more. These trends have led to big pay increases for college-degreed workers in technology and also in many other professional occupations. The pay raises for college-trained workers have swamped those for other workers, thereby leading to bigger gaps between high-paid workers and low-paid workers.
However, some recent national statistics indicate this situation may have changed. In the last two years national numbers show hourly earnings have risen fastest for occupations paying the least, while at the same time increasing the slowest for occupations paying the most. This has resulted in income inequality actually decreasing during the last two years.
Don’t misinterpret this statement. Workers in high-earning occupations still make more money than workers in low-earning occupations. Yet, compared to two years ago, the gap in the earnings is lower today.
What’s happened to cause this outcome? Has our economic world been turned upside down? No, it’s not been turned upside down, but it may have been twisted.
Two forces have collided to reduce income inequality. The first is the pandemic. The pandemic made many people cautious about taking jobs that often require personal contact, particularly if the job is low-paying. Indeed, studies are now revealing a significant number of workers furloughed from their low-paying jobs during the pandemic used the free time to upgrade their skills. Consequently when the economy reopened, those individuals moved to higher-paying occupations.
The second force is demographics. Many – but certainly not all - low-paying jobs are taken by young workers. The jobs I had while in high school and college were certainly low-paying. But due to a declining birth rate, the increase in younger workers has significantly slowed. This has limited the potential availability – in economics, we call it “supply” - of low-wage workers.
Hence, with relatively fewer workers seeking their jobs, firms in low-paying businesses have needed to increase hourly earnings to compete for employees.
The narrowing of income inequality has happened at the national level, but what about in North Carolina? I have tracked trends in income inequality in North Carolina over several decades. I recently updated my measures to include data since the pandemic.
The answer to my question is “yes” – indeed, a big “yes.” I divided North Carolina occupations into three categories: high-paying, middle-paying, and low-paying. High-paying occupations include jobs in sectors like finance, management, and the professions. Middle-paying occupations are in manufacturing, construction, health care, education, and a few others. Low-paying occupations include those in administrative support, personal services, and food service, plus a few more.
For most of the last two decades, income inequality in North Carolina increased, just as in the nation. But since the pandemic, there’s been a dramatic change. From 2020 to mid-2022, average weekly earnings for high-paying occupations rose 2.7%. For middle-paying occupations the jump was 7.2%. But for low-paying occupations, the gain in average weekly earnings was 15.3%, twice the increase for middle-paying occupations and more than 5 ½ times the increase for high-paying occupations.
Combined with some other measures I developed, income inequality in North Carolina in mid-2022 was at the lowest level in two decades.
Of course, low-paying businesses that were induced to raise worker wages by over 15% in less than two years likely had to raise their prices significantly to customers. But this would also happen if the pay jump was for high-paying or middle-paying occupations.
One question is whether workers in low-paying occupations will continue to see similar gains, or even if they will keep their current gains. Much will depend on how businesses with low-paying occupations adjust to these new circumstances in future years. Will they use more technology and consequently reduce employment of people? Or could they reorganize tasks to use fewer workers but continue to pay them more?
The recent news on income inequality in the country and in North Carolina is good. Will the trends continue, or will they be temporary? You decide.
Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University. The full income inequality report is at https://cals.ncsu.edu/agricultural-and-resource-economics/wp-content/uploads/sites/12/2017/07/ncgrowdistpdf2023.pdf